US economy slowed to 0.1 percent growth rate in Q1

April 30, 2014

Written by MARTIN CRUTSINGER, AP Economics Writer

WASHINGTON (AP) — The U.S. economy slowed drastically in the first three months of the year as a harsh winter exacted a toll on business activity. The sharp slowdown, while worse than expected, is likely to be temporary as growth rebounds with warmer weather.

The economy's growth slowed to a barely discernible 0.1 percent annual rate in the January-March quarter, the Commerce Department said Wednesday. That was the weakest pace since the end of 2012 and was down from a 2.6 percent growth rate in the October-December quarter.

Consumer spending grew at a 3 percent rate. But that gain was dominated by a 4.4 percent rise in spending on services, reflecting higher utility bills. Spending on goods barely rose. Also dampening growth were a drop in business investment, a rise in the trade deficit and a fall in housing construction.

The scant 0.1 percent increase in the gross domestic product, the country's total output of goods and services, was well below the 1.1 percent rise economists had been predicting. The last time the quarterly growth rate was so slow was in the final three months of 2012, when it was also 0.1 percent.

A variety of factors held back growth. Business investment fell at a 2.1 percent rate, with spending on equipment plunging at a 5.5 percent annual rate. Residential construction fell at a 5.7 percent rate. Housing was hit by winter weather and by other factors such as higher home prices and a shortage of available houses.

A widening of the trade deficit, thanks to a sharp fall in exports, shaved growth by 0.8 percentage point in the first quarter. Businesses also slowed their restocking, with a slowdown in inventory rebuilding reducing growth by nearly 0.6 percentage point.

Also holding back growth: A cutback in spending by state and local governments. That pullback offset a rebound in federal activity after the 16-day partial government shutdown last year.

Economists say most of the factors that held back growth in the first quarter have already begun to reverse. Most expect a strong rebound in growth in the April-June quarter. The consensus view is the economy will expand by 3 percent in the second quarter.

Analysts say the stronger growth will endure through the rest of the year as the economy derives help from improved job growth, rising consumer spending and a rebound in business investment.

In fact, many analysts believe 2014 will be the year the recovery from the Great Recession finally achieves the robust growth that's needed to accelerate hiring and reduce still-high unemployment. Many analysts think annual economic growth will remain around 3 percent for the rest of the year.

If that proves accurate, the economy will have produced the fastest annual expansion in the gross domestic product, the broadest gauge of the economy's health, in nine years. The last time growth was so strong was in 2005, when GDP grew 3.4 percent, two years before the nation fell into the worst recession since the 1930s.

A group of economists surveyed this month by The Associated Press said they expected unemployment to fall to 6.2 percent by the end of this year from 6.7 percent in March.

One reason for the optimism is that a drag on growth last year from higher taxes and deep federal spending cuts has been diminishing. A congressional budget truce has also lifted any imminent threat of another government shutdown. As a result, businesses may find it easier to commit to investments to modernize and expand production facilities and boost hiring.

State and local governments, which have benefited from a rebound in tax revenue, are hiring again as well.

A survey by the private Conference Board released Tuesday found that while U.S. consumer confidence dipped this month, many people foresee a strengthening economy in the months ahead.

Joel Naroff, chief economist at Naroff Economic Advisors, said he expects job growth to average above 200,000 a month for the rest of the year — starting with the April jobs report, which will be released Friday.

"Those are the types of job gains which will generate incomes and consumer confidence going forward," Naroff said.

Naroff said solid job growth should lead consumers, who drive about 70 percent of the U.S. economy, to boost spending. He expects pent-up demand from purchases that were put off during the harsh winter to power a burst of growth in the April-June quarter. He thinks annual growth for the quarter will reach a vigorous 4.3 percent.